Construction underwriting tightens as insurers eye project losses

Many construction project insurers are restricting who is covered and what coverage is provided through additional insured endorsements, while some states have limited the indemnity that builders can provide each other through their commercial general liability insurance, experts say.

“What has been going on in the market for the last few years is...the use of more restrictive versions of additional insured endorsements, and understanding for our clients how important those are,” said Jamie Knoop, senior vp of the construction services team at Lockton Cos. L.L.C. in Irvine, Calif.

Changes include higher limits of liability that increase the threshold before additional insured coverage kicks in, and requirements that additional insureds be identified specifically in endorsements for the coverage to apply to them, insurers and brokers say.

Mr. Knoop said he's noticed a reduction in policies that cover contractor losses on completed projects.

“There's a plethora of all these additional insured endorsements that can seriously diminish coverage without careful contract review,” Mr. Knoop said.

In addition, states such as Texas and California passed legislation this year limiting the ability of developers or general contractors to be held harmless by subcontractors, or to be covered by subcontractors' insurance policies, for project errors or damages on their behalf.

Tightened policies in those states and others during the past several years have shifted the ways in which additional insured endorsements are being written and used.

Many such changes are being driven by carriers who say endorsements have been providing broader-than-intended coverage for general contractors and subcontractors, said Craig Stanovich, principal and consultant with Holden, Mass.-based Austin & Stanovich Risk Managers L.L.C.

“Quite a few insurers are basically saying, "Hey, we're just providing too much coverage, and we're not getting any premium for it,'” Mr. Stanovich said.

Case law also is shaping the endorsement landscape, he said. For instance, an Illinois appellate court ruled in March that Itasca, Ill.-based contractor FCL Builders Inc. could not be covered under a policy issued by Westfield Insurance Co. because FCL did not have a signed contract identifying it as an additional insured under a general contractor on the project.

“Some courts are now paying more attention to who agreed to do what with whom,” Mr. Stanovich said of how endorsements are being interpreted.

“Because insurers are not necessarily confident that those subcontractors will have adequate coverage or will not have gaps in coverage, they are sometimes requiring a list of subcontractors, and they want to have the right to audit the insurance maintained by subcontractors that are on a project,” Mr. Hastings said.

Industry experts say the restrictions have begun to push the use of owner- or contractor-controlled wrapup programs for large projects, which provide consistent general liability coverage for all parties involved.

“Really you're looking for the efficiency of risk engineering, as well as consistent contract language and limits...as opposed to individual policies being presented by hundreds of different subcontractors and hundreds of different insurers,” said Geoffrey Hall, New York-based senior vp of ACE USA's construction industry practice group.

Integrated project delivery, a model in which owners, architects and contractors work under one contract to collaboratively design and build developments, is being used to help improve development efficiency.

Such agreements, while seen as beneficial in project construction, can make it difficult to determine which party is liable if a project goes wrong, Mr. Hastings said.

“Under IPD, claims of poor project delivery or poor performance that would traditionally be brought by the project owner against the design or construction team are blurred by a collaborative design process, and typically precluded by the multiparty agreement,” he said.

Public-private partnerships, in which projects are developed collaboratively between privately owned companies and governmental groups, also have become more popular in recent years and pose unique coverage issues, said Karen Schwartzkopf, Minneapolis-based senior vp of construction for Zurich North America.

Several such developments have gotten under way in the past year, Ms. Schwartzkopf said, including the $1.1 billion Port of Miami Tunnel project under construction in Florida and the $1.6 billion Eagle P3 commuter rail project being developed in Denver.

The development model is becoming more popular as cash-strapped public entities seek to finance needed infrastructure upgrades. But private companies may have liability that extends beyond the project construction, since they often agree to operate or maintain projects for a period of time after their completion, Ms. Schwartzkopf said.

“Unique to every contract, you have to look at what the allocation of risk provision is and what are the risks assumed under that contract,” she said.